Innovation within the U.S. tobacco settlement bond sector led Fitch Ratings last week to revise a portion of its rating criteria.
The move came about due to new structures that have yet to come to the market, according to Jeffrey Prackup, a director at the rating agency.
Fitch-rated bonds can now earn a BB' rating even if they mature beyond the year 2046. Previously, those bonds had to be paid in full on or before that date in order to earn the BB' rating.
To receive a BB' rating, securities maturing after 2046 will have to pass a "more stringent" cash flow stress scenario, according to Fitch. That means passing the rating agency's BBB-' cash flow stress test throughout the rated term of the security. The revisions went into effect Feb. 21.
Tobacco ABS going forward
More than $5 billion in tobacco settlement ABS came to the market last year compared with no issuance from the sector in 2004. The resurgence of issuance is being fueled by court rulings favoring tobacco companies and low interest rates along with the introduction of new structures backed by the bonds. (ASR, 1/30/06).
Fitch is anticipating stable performance in the sector, along with the potential for issuance growth this year as 2005's positive conditions continue to increase investor demand for the bonds.
Tobacco settlement bonds are issued by cities, counties, states and territories and are backed by future revenues from the 1998 master settlement agreement with Philip Morris USA Inc., R.J. Reynolds Tobacco Co., Brown & Williamson Tobacco Corp. and Lorillard Tobacco Co. Since the agreement was reached, nearly $32 billion in tobacco settlement bond issuance has come to the U.S. market.
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